Trade Secret Theft and the Rise of the Private Right of Action

Reprinted with permission from the April 6 issue of New York Law Journal. (c) 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Theft of trade secrets is likely the most pressing threat to the security of sensitive information maintained by U.S. companies. As Attorney General Eric Holder stated in 2013, ''[t]here are only two categories of companies affected by trade secret theft: those that know they've been compromised—and those that don't know it yet."1

Further, the Office of the National Counterintelligence Executive has estimated losses from economic espionage to be in the tens or even hundreds of billions of dollars annually to the American economy.2

Government's Efforts

Under the Obama administration, the U.S. government has grown increasingly active in determining methods to combat and address the loss of valuable trade secrets. In 2010, the Federal Bureau of Investigation's Counterintelligence Division created the Economic Espionage Unit, a specialized unit focused solely on prosecuting cases under the Economic Espionage Act (the Act). The Act is the leading weapon for prosecutors seeking to bring a criminal suit against potential criminal defendants.3 The Economic Espionage Unit works with private sector partners to investigate and prosecute trade secret theft under the Act.4

The FBI reports that, from 2009 to the end of 2013, the number of economic espionage and theft of trade secrets cases overseen by the Economic Espionage Unit increased by more than 60 percent.5 Further, the FBI reports that economic espionage and theft of trade secrets represent the largest growth area among the traditional espionage cases overseen by the Counterintelligence Division's Counterespionage Section.6

In 2013, the Act was amended to increase the maximum fines for violations of the statute in the case of individuals, from $500,000 to $5,000,000, and in the case of organizations, from $10,000,000 to "the greater of $10,000,000 or 3 times the value of the stolen trade secret to the organization."7 Further, damages arising from the loss of a trade secret under the Act can include "expenses for research and design of the trade secret" and the "other costs of reproducing the secret that the organization has thereby avoided," an amount that can easily run into the millions or billions of dollars, or more, depending on the level of investment made into the creation of the trade secret and the value of the secret.8 The Act also provides for forfeiture of any property or proceeds derived from the stolen or misappropriated trade secrets, as well as any property used or intended to be used to commit or facilitate such theft or misappropriation.9 In addition to the Act, government investigators and prosecutors may rely upon more intellectual property-specific criminal statutes to prosecute potential criminal defendants, including, among others, Criminal Copyright Infringement, Counterfeit and Illicit Labels, Bootleg Recordings, Camcording of Motion Pictures and Trafficking in Counterfeit Goods. Regardless of the array of statutes, the Act appears to be most utilized and effective statutory tool for the government to combat trade secret theft.

The Act has been used increasingly in recent years to specifically combat infiltration of U.S. companies from abroad. In May 2014, for example, the U.S. attorney's office in Pittsburgh obtained an indictment against five members of China's People's Liberation Army who allegedly hacked into the systems of Westinghouse Electric, United States Steel, Alcoa and the steelworkers union. According to the government, plants belonging to these companies suffered large layoffs as a result of espionage that allowed Chinese competitors to flood the U.S. market with below-cost products, including steel pipe.10 Indeed, the welfare of U.S. citizens can be compromised with the loss of a trade secret.

No Private Right Under Espionage Act

To date, the Act is a purely criminal statute. The U.S. government has confirmed that the Act is not intended to be available to private civil litigants. The Department of Justice has issued a "Prosecutive Policy" (the Policy) with respect to the Act, providing, in relevant part:

The [Economic Espionage Act] is not intended to criminalize every theft of trade secrets for which civil remedies may exist under state law. It was passed in recognition of the increasing importance of the value of intellectual property in general, and trade secrets in particular to the economic well-being and security of the United States and to close a federal enforcement gap in this important area of law.11

Further, the Policy states:

Appropriate discretionary factors to be considered in deciding whether to initiate a prosecution under [the Act] include: (a) the scope of the criminal activity, including evidence of involvement by a foreign government, foreign agent or foreign instrumentality; (b) the degree of economic injury to the trade secret owner; (c) the type of trade secret misappropriated; (d) the effectiveness of available civil remedies; and (e) the potential deterrent value of the prosecution. The availability of a civil remedy should not be the only factor considered in evaluating the merits of a referral because the victim of a trade secret theft almost always has recourse to a civil action.12

Clearly, then, the Policy, and the legislative intent behind the Policy, are intended to provide guidance to federal prosecutors who principally address potential criminal defendants, including foreign bad actors infiltrating and stealing trade secrets from abroad. Of course, not every theft of trade secret results in an investigation or prosecution for a variety of reasons, including those reasons under the Policy, as well as the possibility that a government investigator or prosecutor defers an investigation or criminal prosecution, preferring that the matter be resolved civilly. In making this determination, government investigators and prosecutors may consider several factors, including: (1) whether the actor in question is a repeat offender; (2) whether the conduct is egregious where the public health and safety are at risk; and (3) the other information concerning the questioned activity.13

Further, since there is no private right of action under the Act for the theft of a trade secret, those private plaintiffs who wish to pursue a remedy in civil litigation are relegated to suing under applicable state statutes sounding in misappropriation, often in state court. State legislatures have also responded. To date, 47 states have enacted some form of the Uniform Trade Secret Act (UTSA).14 (New York is not among the 47 states who have adopted the UTSA. Indeed, there is no civil law or other statute of general application that protects or defines "trade secrets" under New York law. Instead, trade secrets in New York are protected solely through common law.)15

Thus, given the guidelines under the Policy, the wide latitude afforded to investigators and prosecutors and possibility of no or deferred prosecution, as well as the growth in economic espionage and the pressing need to address theft of trade secrets, the time for the private right of action under the Act is upon us, and both inside and outside counsel should sit up and take notice.

Rise of the Private Right of Action

On July 29, 2014, Rep. George Holding, R-N.C., introduced the Trade Secrets Protection Act of 2014 (H.R. 5233) with bipartisan co-sponsors.16 On Sept. 17, 2014, the legislation, as amended, was approved by the House Judiciary Committee.17

As drafted, the Trade Secrets Protection Act would amend the Economic Espionage Act to create a federal civil remedy for trade secret misappropriation in order to help American companies protect their intellectual property from theft.18 As defined by the bill's sponsors, trade secrets under the proposed act include "such vital proprietary information as confidential formulas, manufacturing techniques, and even customer lists."19

In its current version, the proposed Trade Secrets Protection Act would permit the owner of a trade secret to "bring a civil action under this subsection if the person is aggrieved by a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce."20 Notably, the Trade Secrets Protection Act provides for an ex parte civil seizure order for the "seizure of property necessary to preserve evidence in a" federal trade secret civil action or "to prevent the propagation or dissemination of the trade secret that is the subject of the action."21 The Trade Secrets Protection Act also provides for a five-year statute of limitations.22

Similarly, on April 29, 2014, Sen. Christopher Coons, D-Del., introduced the Defend Trade Secrets Act of 2014 (S. 2267) with Sen. Orrin Hatch, R-Utah.23 The Defend Trade Secrets Act of 2014 also creates a private right of action for trade secret theft.24 Under the Senate version, a federal civil action may be brought for: (1) a violation of the federal criminal trade secret provision; (2) a violation of the foreign economic espionage provision; or (3) based on "a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.25 The Defend Trade Secrets Act of 2014 also provides for an ex parte civil seizure order and a five-year statute of limitations.26

Both sets of proposed legislation may provide advantages to civil litigants over and above state statutes and statute courts. For example, where both proposals provide for a five-year statute of limitations, under New York law, the statute of limitations for misappropriation of trade secrets is only three years.

Opponents of the legislation have asserted that, among other things: (1) there already exists effective and uniform state laws; (2) the proposed Acts will damage trade secret law and jurisprudence by weakening uniformity while simultaneously creating parallel, redundant and/or damaging law; (3) the Acts are imbalanced and could be used for anti-competitive purposes; (4) the Acts increase the risk of accidental disclosure of trade secrets; and (5) the Acts have potential ancillary negative impacts on access to information, collaboration among businesses and mobility of labor.27

Compliance and Precautionary Steps

Despite the inevitable squabbling within Congress on exact terms of the legislation, and the objections of opponents of the legislation, the rapid expansion of corporate espionage coupled with the finite resources of the government portend some expansion of the Act to include a private right of action for theft of trade secrets.

It has always been important for companies and their counsel to "batten down the hatches" when it came to protecting a company from the loss of trade secrets. However, the imminent rise of the private right of action has underscored the need to take immediate and direct action to check and re-check compliance and response programs to monitor and protect trade secrets and intellectual property including that intellectual property that may constitute a trade secret. A private right of action will not always involve one company suing another company or its employees or agents for the theft of a trade secret. Indeed, liability could arise where a company has lost significant revenues or values due to the theft of a trade secret and failed to take appropriate measure to protect such a loss. The rise of a private right of action may even create incentives for potential class action plaintiffs who have allegedly lost value in a company due to the loss of a trade secret. Although individuals and organizations involved in the loss of trade secrets are not without defenses in a civil action, potential liability is enormous.

Companies and their counsel are therefore cautioned to take the following list of non-exhaustive steps and to carefully review these steps with counsel:

First, the organization must identify and inventory the trade secret. Sometimes the trade secret is obvious and sometimes the trade secret may not be so apparent (customer lists). An organization's failure to identify a trade secret may not only lead to the loss of the trade secret itself, but the failure to identify such a trade secret could theoretically be used by plaintiff as a means of showing a judge or jury improper internal procedures and protocols.

Second, protecting the trade secret is a critical, but often overlooked, step. Methods of protecting trade secrets are many, but include, among others, computer passwords, physical security for buildings and bank vaults, and even more mundane measures such as well-drafted, enforceable non-disclosure agreements.

Third, the organization must also establish written procedures outlining its trade secrets and responses to threats. Additionally, these procedures should include measures concerning containment, assessing damage and preserving evidence. Indeed, the failure to mitigate damages could provide additional compensation to future plaintiffs.28

‘Trojan Horse' Threat

Often the threat of the loss of a trade secret can come in the form a "Trojan Horse" or a new employee. When a company hires a new employee, the company must protect against at least two real threats: First, the new employee is engaging in espionage on behalf of a competitor; and second, the new employee is bringing with him or her trade secrets from another company. With regard to the first possibility, comprehensive background checks and legal monitoring of the employee's computers and work product may be in order, particularly for those with access to sensitive information. Any indicia of espionage may be a crime and companies are counseled to consider referring such matters to law enforcement.

With regard to the second possibility, reviewing the employee's non-compete or disclosure agreements from a prior company is critical, as well as reviewing any documents, thumb drives or other means of transporting sensitive information that an employee brings with them to a new company. Although the text of the amendment to the Act has not yet been passed, it is quite conceivable that such language will include liability for an actor such as a company who was, or should have been aware, that trade secrets have been misappropriated and brought to a new company. For example, the Defend Trade Secrets Act of 2014 includes such proposed language as to whether a defendant has provided "implied consent" to the theft, a term that, at a minimum, is open to interpretation when a company fails to take proper measures in evaluating its new hires.29

Conclusion

The loss of a trade secret can be incredibly devastating to a company where, within nanoseconds, a trade secret can be whisked electronically overseas and not be recovered. As the current administration has pointed out, lives and jobs are at stake. Nonetheless, the Department of Justice cannot or will not prosecute many trade secret thefts.

However, the government is devoting significant resources to investigating and prosecuting theft of trade secret crimes under the Act as well as other applicable statutes, and companies and individuals should also devote their resources to precautionary steps and strong compliance programs. Although state law has traditionally provided remedies for such a loss, the time for the enactment of federal legislation providing a private right of action has come. The use of federal rules of civil procedure as well as a new statute of limitations, along with the definitions of a trade secret under such federal legislation, will inexorably change the legal landscape. The civil cases may not only appear in the business to business context, but may involve such eventualities as multibillion-dollar class action lawsuits.

Individuals and organizations must immediately prepare protective measures to either avoid or ameliorate the inevitable rise of the private right of action.

Reprinted with permission from the April 6 issue of New York Law Journal. (c) 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.